Industry Sees Record Wholesale Beef Prices, But Not Profits

The wholesale beef price set new all-time record highs recently, which is outstanding news. In the first week of May, we finally topped the price that had been set in fall 2003, prior to BSE. It’s truly impressive that we attained this level in just under 10 years from that watershed event. Of course, general inflation would have eventually gotten us there.

Part of the reason it only took us 10 years, however, is the ethanol effect. The tripling of corn prices brought on by the ethanol boom accelerated the decline in cow numbers dramatically. It also reduced industry profits, and raised production costs to such a degree that prices had to rise significantly. Certainly cynics will look at production costs compared to 2003, and the dramatic reduction in the size of our industry, and make the case that the business environment still trails that of a decade ago by a sizable margin.

I think the pessimism, though, is a factor of profitability.

While all-time record wholesale beef prices are a good thing, the feeding industry is still mired in a historically long session of losses. All the experts say that, because of ethanol and the drought, the cattle industry needs to reduce its feeding capacity and the size of our industry, but it’s still a painful process as the feeding sector struggles to survive.

Meanwhile, the cow-calf industry – if one separates out the increase in land prices – hasn’t seen a significant jump in equity; the increased costs and reduced numbers have negated the positive impact from higher prices.

The situation hasn’t been great for the packing industry, either. As cattle numbers have continued to decline, that sector has begun the process of idling plants, as well as seeking new optimum levels of production.

Even more important than the lack of profitability, however, is the concern over beef demand. Economists continue to warn the industry about the growing disparity between beef prices and those of pork and poultry. Beef demand hasn’t been dismal, just less than the level we had hoped. An early indication of potential demand issues is the shift away from branded-beef product back to generic, as consumers become price resistant at these higher levels.

But I’d caution producers to discount some of these stories that are pointing to this trend as being fully explained by price resistance and weak demand. Consumers purchased branded products in part to acquire a better product. In fact, many brands are continuing to grow across many segments; the brands that deliver a consistent and improved eating experience for their niche are continuing to command premiums. It is the brands that were more about marketing than actual product differentiation that are feeling the pinch as consumers search for value.

There’s no doubt, however, that the price concerns are real. We’ll have to wait and see whether beef demand will allow cattle producers to reach profitability at this greatly reduced cowherd size, or if the industry will have to continue to liquidate. We’ve already seen some of the pressures created by the higher prices in the fast-food industry, where the players are adding bacon, pork or chicken to their menus, and reducing beef. McDonald’s is eliminating the 1/3-lb. Angus burgers from its menu as the offering has become price prohibitive for the chain.

The industry now looks to the big holiday weekends and beef clearance to get an idea of whether the new wholesale beef price marks are a short- or long-term top.